There is tremendous profit potential in turnarounds. The reasons for that are many, but the majority of them relate to the fact that most investors are afraid of turnaround situations. Wall Street unjustly hates the down-and-out companies for one reason or another. Turnaround investing is looking for opportunities to invest in these companies, and the profit opportunity rests in the moment of their turnaround. They had dropped in share price (for whatever reason) but are about to turn. Investors who get involved when the company is at the bottom can stay with it on the way up and make some hefty gains.
Don’t turn your head away from a good turnaround investing opportunity. If you’re up for it, let me give you some recommendations and tell you what pitfalls to avoid.
Avoid Timing the Market
There are cycles in the stock market, but who can successfully time them? In the investment business, it is believed that the market-timers are the ones with the holes in their shoes. Instead of trying to time the market, choose and stick to a level of stock market exposure. Focus all your efforts on the analysis of stock picks.
Insider Buying
Insider buying is legal and based on public information. It consists of buying company shares by someone who’s employed by that organization. Insider trading (trading on undisclosed inside information) is illegal, but employees can buy/sell their company’s shares and report their trading activity to the SEC.
Distressed Investing
Compared to turnaround investing, investing in distressed securities involves higher risk but also higher returns. In these situations, investors usually focus on bonds. These securities may have legal claims on certain assets and may receive cash or new securities in a bankruptcy reorganization, which is why they can provide greater downside protection than equities. However, I’d rarely recommend buying stocks of a company that operates under the protection of the U.S. Bankruptcy Court. Even if a company can emerge successfully, there is usually not enough value in the reorganized company to give the old stock any value.
Other Classes of Securities
The most significant upside potential lies in the common stock of a turnaround company. However, other classes of securities, such as preferred stock or bonds, may also offer significant profit possibilities.
For example, if an investor wants equity-like returns but can’t bear the volatility of a stock, convertible bonds are the best choice. Also, companies that issue high yield debt are in the turnaround process. High yield issues often have return-and-risk characteristics closer to stocks.
Don’t Be Greedy
Investors who hold onto stocks for too long or chase only hot stocks are usually the ones who fail or do poorly. You can make money by being consistent in pursuing a “bullish” long-term strategy. Also, be wary of trends when choosing stocks. When hunting for stocks, there must be a strong core business with long-term viability.
In the end, you need to realize that not all stocks go up. Try to ignore how much you paid for the stock and figure out what is the risk/reward potential in each stock at the moment. “Where is it going at the moment?” is always the question. Not every stock goes up immediately, and this is especially true to turnarounds.
Once you find yourself in a situation when you don’t know whether to invest or how to do it, contact Blackhawk Partners Inc.for expert help and consultation. Our professionals with extensive hands-on experience in turnaround investing can guide you through your turnaround investing endeavors. We are here to transform your ideas into tangible results.
By : Ziad K Abdelnour
Ziad is also the author of the best selling book Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics (Wiley, 2011),
Mr. Ziad Abdelnour continues to be featured in hundreds of media channels and publications every year and is widely seen as one of the top business leaders by millions around the world.
He was also featured as one of the 500 Most Influential CEOs in the World.
